A Partial 1031 Exchange, also known as a “partial like-kind exchange” or “drop and swap” is a variation of a like-kind exchange in which an investor sells a portion of their property and uses the proceeds to purchase a replacement property.
In this type of exchange, the investor will sell a portion of their property and transfer the remaining portion to a Qualified Intermediary who will then use the proceeds from the sale of the portion to purchase a replacement property. The remaining portion of the property that was not sold is considered “relinquished property” and the replacement property is considered “replacement property.”
The main benefit of a Partial 1031 Exchange is that it allows the investor to diversify their real estate portfolio without paying taxes on the portion of the property that was sold. The exchange must comply with all the rules and regulations for like-kind exchanges set forth by the IRS, including the 45-day and 180-day identification and exchange periods.
However, it can be a more complex type of exchange and it might require additional planning and coordination. Additionally, in order to qualify as a 1031 exchange, the investor must use all the proceeds from the sale of the partial interest in the relinquished property to purchase the replacement property.